Tough Pill to Swallow: Court Imposes Over $3 Million in Civil Penalties on Dietary Supplement Company

On March 31, 2015, the United States District Court for the District of Columbia issued an opinion, granting the Department of Justice’s (DOJ) motion for a final order providing injunctive relief, monetary relief, and civil penalties against Daniel Chapter One and James Feijo for making claims that Daniel Chapter One’s dietary supplements could treat, cure, or prevent cancer, inhibit tumors, and lessen adverse side effects of radiation and chemotherapy. For those following this case, this final order is a long time coming, as the defendants repeatedly refused to comply with earlier cease-and-desist orders. As a result, the FTC and DOJ have doggedly pursued enforcement against the defendants since the FTC first initiated an administrative proceeding for false and deceptive practices under the FTC Act in 2008.

The court granted summary judgment on liability for violations of the cease-and-desist order in September 2012, and finally, in 2014, the U.S. filed a motion for entry of final judgment. The recent opinion represents the culmination of a long battle between the supplement marketer and the government, and demonstrates the various penalties available to the court when orders are violated. In particular, the opinion highlights the court’s authority under FTC Act Section 13(b), 15 U.S.C. § 53(b) to order equitable redress, and serves as a cautionary tale for how high civil penalties can become when a business fails to comply with an order.

Section 13(b) Equitable Redress

First, the court awarded $1,345,832.43 in equitable monetary relief, finding that Section 13(b) gives the court the flexibility to award consumer redress for violation of an administrative order. Although the FTC Act “does not expressly authorize a district court to grant consumer redress,” the court stated that “Section 13(b)’s grant of authority to provide injunctive relief carries with it the full range of equitable remedies, including disgorgement of profits.” The court noted that every court that had addressed this issue found that Section 13(b) entitles the FTC to seek equitable monetary relief. Ultimately, the court found that a permanent injunction was necessary to protect the public and equitable monetary relief was appropriate.

Civil Penalties

In addition, the court addressed the permissibility of civil penalties against persons who violate an FTC order, awarding a substantial civil penalty of $3,528,000. The court stated that the defendants “intentionally and knowingly violated the FTC’s order from April 2, 2010 through May 24, 2014, when the defendants began complying with the order. The court identified the maximum civil penalty as $12,544,000, or $16,000 per day for 784 days, because in instances of a “continuing failure to obey or neglect to obey a final order of the Commission, each day of continuance of such failure or neglect shall be deemed a separate offense.” The court has the discretion to award the appropriate civil penalties based on five factors:

Good or bad faith of the defendants

Injury to the public

Ability to pay

Desire to eliminate the benefits derived by the violations

The necessity of vindicating the authority of the FTC

In imposing the $3,528,000 penalty ($4,500 per day), the court found that defendants acted with actual knowledge of their unlawful conduct (bad faith), significantly harmed the public, and had the ability to pay. Further, the court determined the FTC required vindication and the benefits derived from the violations needed to be eliminated. As such, all of the factors weighed in favor of imposing a significant civil penalty.

This case serves as a reminder that once the FTC issues an order, the consequences of failing to do so can be a tough pill to swallow.

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